What if Sin stocks continue to outperform the market in 2012 – up 14.5% YTD versus a 5.7% gain on the FBMKLCI index – as they may be spared excise duty hikes for another year given that the 13th General Elections will now be held after Budget 2013 scheduled on Sep 28.
Sin stocks have rallied since Budget 2012 was announced last Oct when the government surprisingly did not raise excise duties on beer and cigarettes. Few had expected the government not to increase excise duties on cigarettes as the tobacco industry had not been spared an excise duty hike since 2002. In Oct 2010, the government raised excise duties on cigarettes by 3 sen/stick (+15.8%) compared with only 1 sen/stick or 5.6% in 2009.
On the other hand, the government has not raised excise duty on liquor for the last six years. At MYR740 per hectolitre, Malaysia’s beer duties are the second highest in the world and any further increase on already high beer duties will have a negative impact on duty collection as evident from 2004-06 when excise duties rose at an 18.5% CAGR but duty collection went up by only 5.1%. Tobacco industry volumes rose 4.5% YoY in 1H 2012, and are now projected to rise by 4-5% in 2012 instead of falling 5-10% when excise duties were raised by 3 sen per stick in previous years. Excise revenue from cigarettes has risen by ~6% despite no excise duty hike in the last Budget as tougher enforcement measures reduced illicit sales by 2.6ppt to 34.7%. Firm commodity prices and recent government handouts have also contributed to the switch from illicit and extremely low-priced cigarettes to premium brands.
However, in the event of a surprise tax hike, tobacco companies would suffer less immediate earnings downside due to their inelastic demand and lower historic growth base compared with brewers. BAT would generally fare better than JTI as contract manufacturing accounts for about one-third of its revenue and premium brands like Dunhillis less susceptible to down-trading risks. As for brewers, Carlsberg will likely weather a tax hike better than Guinness due to its substantial 30% EBIT contribution from Singapore and wider portfolio of imported premium beers. As a tax hike is unlikely in Budget 2013, wecontinue to prefer brewers over tobacco companies given its better growth prospects and higher dividend yields.We are Underweight the Tobacco sector, with DCF-based target prices of MYR55.00 for BAT and MYR6.70 for JTI. BAT was downgraded to Sell as its valuations are near their peak and its dividend yield has dropped to a 10-year low following the recent run-up in its share price while its 2H12 earnings are expected to be flat after decelerating in the last two quarters. In the Brewery sector, we prefer Carlsberg to Guinness given its stronger CY12-13 CAGR despite lower dividend yields.
by Maybank IB
